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Accounting board clears up some CECL confusion for small banks with Q&A

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Accounting board clears up some CECL confusion for small banks with Q&A

Questions from bankers led the Financial Accounting Standards Board to create a question-and-answer document to help explain a simplified method banks can use to calculate their loan losses, according to comments made during a Dec. 19 meeting.

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With the effective date for the new current expected credit loss accounting model approaching, banks will need to choose a way to calculate their lifetime loan losses. One approach uses the weighted average remaining maturity, or WARM.

FASB has said repeatedly that the WARM method is an acceptable approach for banks to use, but the board has still received numerous inquiries from confused bankers. In response, accounting board staff are drafting a Q&A document that will clarify which portfolios this methodology is appropriate for, ways to perform lifetime loss estimates using WARM and how institutions should think about qualitative factors as part of this approach.

Board members commended the effort, with one saying it added "bones to a principles-based approach."

"It provides more clarity that I think is already out there [but] that needed to be reinforced about the scalability of CECL for smaller, less-sophisticated entities or assets," the member said.

In other CECL updates, the board announced that it intends to address a November proposal from regional banks in a roundtable to be held sometime in January 2019. The proposal would split the provision for credit losses into three parts: expected losses within the first year would be recorded in the provision for losses in the income statement; expected losses beyond a year would be recorded to accumulated other comprehensive income, or AOCI; and the lifetime losses of impaired financial assets would be recognized entirely in earnings.

FASB spokesperson Christine Klimek said in a statement before the meeting that staff is conducting research with the banks that asked the board to consider splitting the allowance into different buckets, as well as other stakeholders.

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Click here to read more of our coverage on how banks are complying with CECL and IFRS 9.

Click here to read S&P Global Market Intelligence's analysis of CECL's expected impact on the industry, and here to read about how CECL may have fared during the Great Recession.